ISLAMABAD - Major cuts in the development spending and oil subsidies proved helpful in keeping the fiscal deficit at around 1.9 per cent of the projected GDP growth, which is less than the half of the annual target of 4.2 per cent during July-December 2008-09. A Mid-Year Review of the Economic Situation (July-December 2008-09), released on Thursday by the Economic Advisory Wing of the Ministry of Finance reflected a mix picture of the national economy with increase in current account deficit by 20.1 per cent, trade deficit by 15.3 per cent, falling of overall foreign investment by 1.4 per cent and inflation at 24.4 per cent, above the annual target. For the year 2008-09, given domestic and international economic pressures especially high inflation and macroeconomic imbalances, the GDP growth has been envisaged at 3.4%. This is to be contributed by sectoral growth rates of agriculture (3.0%), manufacturing (1.5%) and services sector (4.2%). The average inflation is projected to be around 23 per cent. Government borrowing for budgetary support has recorded an increase of Rs.289.0 billion as compared to Rs.213.8 billion in the comparable period of the last year. The SBP financing has shown a net increase of Rs.298.2 billion while financing from scheduled banks witnessed a net contraction of Rs.13.7 billion during July 01, 2008-January 10, 2009. The government has decided in the economic stabilization program to adhere to the fiscal deficit target reverently and during the first half the fiscal deficit hovered around 1.9 per cent of the projected GDP for 2008-09 which is consistent with annual fiscal deficit target of 4.2 per cent. The fiscal improvement in the first half has largely based on reduction of oil subsidies and a cut in development spending. All meaningful efforts to expand revenues particularly by broadening the tax base will only work in the medium-term. The faster growth of 35.5 per cent in the total revenues is more than off-set by even faster growth of 25.2 per cent in the current expenditure. The financing patterns of fiscal deficit remained dominated by the banking system which financed 66 per cent of the fiscal deficit and only 29 per cent were financed by the non-bank sources. The government remained well ahead of the SBP financing limit allowed by the Economic Stabilization Program. The external inflows to finance the deficit remained negligible at Rs.12 billion only. Despite a decline in fiscal deficit in Q1 FY09, the growth in domestic debt accelerated reflecting non availability of financing through external sources. The stock of domestic debt grew by 6.3 percent since beginning of the fiscal year as against a growth of 4.6 percent in the comparable period of last year. The main contribution came from a large increase in floating debt whereas, the stock of permanent debt declined by 8.4 percent on the back of poor response from investors in the PIB auction. Unfunded debt witnessed a moderate growth of 3.3 percent in Jul-October FY 09. Pakistan's current account deficit has expanded by 20.1 per cent during July-December 2008. Current account deficit widened to $ 7.3 billion as against $ 6.1 billion last year. In the month of December 2008, the current account deficit was just $ 458 million as against $2.1 billion in October 2008. Drastic reduction in imports growth as well as better performance of the private inflows is contributing to improvement in the current account deficit. Going forward, Pakistan is likely to miss the target of current account deficit by a slight margin. Foreign Exchange Reserves declined substantially in the initial months of FY09 dropping from $11.4 billion at end June 2008 to a low of $6.4 billion by November 25, 2008. This depletion of reserves in the five months was lower than fall in forex reserves for the whole of FY08. The subsequent partial recovery in November 2008 owed essentially the inflow of $ 3.1 billion from the IMF following Pakistan's entry into a macroeconomic stabilization program. The import coverage ratio declined to an uncomfortable level of 9.1 weeks as of end October 2008 from 16.8 weeks of imports as of end June 2008 but it improved to 12.4 weeks of imports by end December 2008. exchange rate after remaining stable for more than 4 years, lost significant value against the US dollar and depreciated by 21% during March-December 2008. Most of the depreciation of rupee against dollar was recorded in post November 2007 owing to combination of factors like political uncertainty, trade related outflows and speculative activities. With successful signing of standby arrangements with the IMF, the rupee got back some of its lost value. It is expected that with revival of external inflows from abroad in the coming months of the fiscal year, the exchange rate will remain stable. The rupee fell 16.3 per cent during July-October 2008 reflecting substantial loss of forex reserves. Pak rupee recovered some of its earlier losses against the US dollar and registered a net depreciation of 13.3 per cent for the period Jul-Dec 2008 The external debt & liabilities recovered in the first quarters and actually fell in absolute as well as relative terms mainly because of lower than anticipated net disbursements and positive translation impact of appreciation of dollar versus yen and euro. External debt and liabilities (EDL) at the end of September 2008 stood $ 45.5 billion which is lower by around $ 800 million from end June 2008 stock of US$ 46.3 billion. This includes around $600 million positive translation impact of US dollar's appreciation and $ 200 million negative net disbursements impact. The EDL stock has declined by 1.6 percent but shown slight increase in relative terms. The EDL as percent of GDP has increased from 27.6 percent of GDP in end June 2008 to 27.9 percent of GDP by end September 2008. However, the EDL as percent of foreign exchange earnings decreased from 125.3 percent to 112.2 percent. The country's debt burden defined as a ratio of external debt and liabilities to GDP declined from 50.9 per cent at the end of 2001-02 to 27.6 per cent of GDP by end June 2008; however, it increased to 27.9 per cent by end September 2008. Similarly, the EDL were 236.8 per cent of foreign exchange earnings but declined to 125.3 per cent by end June 2008 and further to 112.2 per cent by end September 2008.